Learn the basics of life insurance

Life insurance money can help ensure your family is not burdened with significant debt when you die. Life insurance, the cornerstone of a solid financial plan, protects your loved ones against financial loss if they lose you and your income.

Before you decide how much insurance to purchase or which options to add to a basic policy, you need to identify your needs and determine the coverage that meets those needs best.

If you need life insurance to pay for burial expenses or estate planning, permanent insurance may ne the solution. If you need life insurance to pay for financial obligations that last a fixed amount of time- mortgages, day-care or college- term insurance may be the solution. To make an educated decision, you need to know more.

Term insurance

As its name suggests, term provides coverage for a specified amount of time, or term. The term of the policy depends on the product you select, and the death benefit pays only if you die during the term of coverage. Some term policies are renewable, meaning you have the option to renew your coverage at the end of the policy term without proof of insurability. Also, you are generally able to convert in-force term insurance to permanent insurance without proof of insurability.

Permanent insurance

For as long as you can keep paying the premiums, permanent life insurance promises to provide your beneficiary a benefit when you die. Unlike most term insurance, permanent insurance offers the potential for cash value accumulation. Whether and to what extent the cash value is guaranteed depends on the type of permanent insurance involved.

Cost

Term insurance premiums are initially less expensive than permanent insurance premiums. This allows you to buy more coverage with each dollar you spend. Generally the older you are the higher term insurance premiums will be.

For example, if a 25-year old purchases a 10-year term policy, the premium will be relatively inexpensive compared to the premium on a permanent policy with a level premium. When that term expires in 10 years, the now 35-year-old would pay a higher premium to get the same term coverage, while if the level premium permanent policy had been purchased, the premium would remain the same throughout the insured’s lifetime.

Cash value

Term insurance generally builds no cash value. That means once the term of the policy ends or you stop paying the premium, the policy and the coverage end with no value. Permanent insurance, however, can build cash value and offers associated benefits. Those benefits include:

If you cancel or surrender your policy, you receive the cash value your policy has accumulated, less any surrender fees, outstanding loans and unpaid interest.

If you need to stop or reduce your out-of-pocket premium costs, and your policy has accumulated sufficient cash value, you can use the cash value in your policy to help pay your premiums. You can also use the cash value to make a lump sum payment to purchase extended term insurance or paid-up life insurance with a lower death benefit.

You may also take a loan from the insurance company using the cash value in your policy as collateral. Your beneficiary’s death benefit will be reduced by the amount of any outstanding loan and unpaid interest if you do not repay the loan.

Where do you go from here?

Once you understand the two basic types of life insurance, you’re better equipped to make decisions regarding your life insurance program. If you decide permanent life insurance is right for you, you have several types to consider, each of which has certain advantages and disadvantages. Although there are a variety of permanent life insurance policies, they are generally categorized as: whole life (also called ordinary life), universal life or variable universal life.

Whole life insurance is the most common type of permanent life insurance and you generally pay a level premium for the duration of the policy.

Universal life insurance is similar to traditional whole life insurance but offers more flexibility and involves greater risk. The cash value of universal life is “interest sensitive,” so its growth is affected by the general financial climate. As the cash value portion of the policy fluctuates, so too may the death benefit available at the time of your death and the premiums required to prevent lapse. As a result, a universal life insurance policy needs to be closely managed. After you pay your initial universal life premium, you can pay premiums at any time, in virtually any amount, subject to minimums and maximums. You may also change the death benefit on your policy more easily than with a traditional whole life policy.

Variable universal life insurance (VUL) is similar to universal life in that the cash value is affected by the financial markets. However, with a VUL policy, you select the investment options for your premiums. The insurance company offers a variety of investment options that vary in degrees of risk and potential reward. The insurer may also offer a fixed account option with a guaranteed interest rate. The cash value of your policy is not guaranteed (except amounts invested in the fixed account option) and, as the policyholder, you bear the investment risk. The cash value, death benefit and the amount of premiums required to prevent lapse, are affected by the performance of the investment options selected. Flexibility in premiums, death benefit and investment options allows you to customize your policy. However, VUL policies require you to closely monitor your policy’s performance to make sure your death benefit is adequate to meet your needs and to prevent lapse.

You’re ready to start

My staff and I can provide you with more information and work with you to create a life insurance program tailored to meet your needs and your risk tolerance. Please email me anytime at gary.cucchi@horacemann.com or call me at 813-600-3268.